Understanding the European Consequences of a Modern Greek Odyssey
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October 2015 Understanding the European Consequences of a Modern Greek Odyssey Heather A. Conley and James Mina Over the past 18 months, Greece has been led by Greece’s third bailout program and a set of two very different prime ministers and policies that run contrary to its stated policy governments: those of the center-right New platform. Yet while a large portion of the Greek Democracy leader, Antonis Samaras (from June population supports Syriza’s anti-austerity 20, 2012, until January 26, 2015), and the far-left stance, the country remains largely pro- Syriza leader, Alexis Tsipras (who was elected European and pro-euro. As Greece’s on January 26 and reelected on September 20). membership in the common currency has These leaders have had vastly different become deeply intertwined with its ability to domestic, European, and foreign policies, enact reforms, the stage is now set for a period particularly with regard to their responses to of immense political uncertainty as Athens the country’s protracted economic crisis and must balance both of these competing policy interaction with Greece’s creditors. priorities. Elections matter. Following Prime Minister Greece’s policy turbulence is not merely a Tsipras’s election, Greece went from posting domestic problem, however; its impact positive economic growth in December 2014 reverberated throughout the Eurozone and and being poised to exit its bailout program, to challenged the very foundations of the fighting an impassioned battle against its European project as leaders and publics alike creditors in pursuit of more lenient terms responded to these developments. While following Syriza’s electoral victory on January previously European governments have 25, 2015, to imposing capital controls and consistently stated their firm commitment to accepting a third and most restrictive financial preserving the integrity of the Eurozone at all assistance package on July 13. After agreeing to costs, for the first time, Europe’s largest creditor such a substantial policy change, the Syriza country, Germany, indicated a willingness to party splintered, forcing Prime Minster Tsipras give Greece “a time out” from the currency to hold snap elections on September 20. union over the unwillingness of the Tsipras government to cooperate and implement the Despite this reverse performance, on terms of its bailout agreement in full. With this September 20 the Greek people reelected the taboo broken, divergent economic philosophies exact same government, although its majority is and interests between northern and southern slim. The second Syriza government is now European nations continue to hinder the charged with implementing the terms of creation of an “ever-closer union.” 2 | HEATHER A. CONLEY AND JAMES MINA The past 18 months represent a consequential IMF loan on June 30 of this year. In hindsight, period for the Greek people and the European Greece’s creditors neither understood the Union, which must be better understood. These devastating consequences that their measures policy shifts were dramatic and sudden, and (based on a grossly miscalculated austerity they correspond with three distinct phases in multiplier) would have for the Greek economy governance during which Greece not only and society; nor did they appreciate how experienced radical changes in its economic resistant the Greek people would be to a and social policies but also its diplomatic and fundamental change in how they governed political environment as well. The following themselves. policy brief draws upon real-time insights gleaned from a CSIS discussion series that Since 2010, Greece has received a total of €240 focused on the Greek EU Council presidency, billion from its creditors as represented by the which brought a series of senior Greek officials International Monetary Fund (IMF), the from both the Samaras and Tsipras European Central Bank (ECB), and the governments to Washington to illuminate European Commission in exchange for Greece’s decisions during each of its three sweeping reductions in public-sector policy phases, reflect on the marked shift in its expenditure and a massive sale of state assets economic prospects, and consider the dynamics flagged at €50 billion. and factors that have shaped this critical chapter in Greece’s—and Europe’s—recent Nonetheless, under the coalition government of history. Prime Minister Antonis Samaras (which included the center-right New Democracy party Phase One: “Green Shoots” of and the center-left Pan-Hellenic Socialist Economic Growth (December 2013– Movement, or PASOK) from June 20, 2012, to January 26, 2015, Greece made significant December 2014) progress toward fulfilling its structural reform agenda. By 2014, Greece had moved up 28 Greece is a country of firsts. Of course, Greece is places in the World Trade Organization’s recognized as the birthplace of democracy but “Doing Business” rankings since 2012 and the it is more readily known as the first country to Organization for Economic Cooperation and succumb to Europe’s Sovereign Debt Crisis in Development (OECD) placed Greece among its 2008 and the first to accept a European bailout top members in adopting pro-growth policies. package (and a second and third one), which Greece also exceeded its budget expectations mandated deep spending cuts and a rigorous for 2013 ending with a current account and structural reform agenda. While other primary surplus for the year. By the second Eurozone countries—Portugal, Ireland, and quarter of 2014, Greece had achieved GDP Spain—were forced to accept painful bailout growth (year-on-year) of 0.5 percent and by the and bank packages, these countries have third quarter had achieved its nadir of 1.4 formally ended their bailout programs. Yet percent GDP growth.1 It was expected that the Greece’s bailout program—by far the largest Greek economy would grow by 0.6 percent and most rigorous—was also the first to end overall in 2014. Greece also began to enjoy a unceremoniously as Greece also became the first developed country to ever default on an 1 Hellenic Statistical Authority, “Quarterly National portal/page/portal/ESYE/BUCKET/A0704/PressReleases/A0 Accounts: 3rd Quarter 2014 (Provisional Data),” Press 704_SEL84_DT_QQ_03_2014_01_P_EN.pdf (seasonally release, November 28, 2014, http://www.statistics.gr/ adjusted figures). UNDERSTANDING THE EUROPEAN CONSEQUENCES OF A MODERN GREEK ODYSSEY | 3 laws. Slowly, unemployment in Greece Greek GDP Growth (% yoy) - Phase I decreased from a high of 27.5 percent in 6 December 2013 to 25.9 percent in January 4 2015.2 The Samaras government took initial 2 steps to scale back its bloated public sector 0 (which accounted for 53.6 percent of GDP in 3 -2 2009 ) by reducing the number of public -4 employees (Athens cut as many as 161,000 state- funded positions between 2010 and 2014),4 -6 although this encountered strong resistance. -8 2012 2013 2014 2015* 2016* To help soften its austerity program and Phase I reorient its flagging economy, Athens sought to *Data for 2015 and 2016 is forecast. capitalize on its unique geographic position by reinventing itself as a regional energy hub. During this period, Greece enhanced its Greek Parliament Seat Distribution - resource exploration efforts and launched a call Phase I for tenders in the onshore blocks in the west of Syriza Center-Left New Democracy Far-Right the country. Already, Greece is home to the only Other liquefied natural gas (LNG) terminal in the Balkans and its close proximity to the large natural gas reserves off the coast of Cyprus and Israel presents it with the unique opportunity to Jun-12 71 33 129 38 29 serve as a point of entry for European markets. Toward this end, the Samaras government enhanced its cooperation with regional neighbors (in particular Cyprus, Israel, and Egypt) to begin considering possible pipeline *Data for 2015 and 2016 is forecast. connections. The East Med pipeline, for example, would link Israeli and Cypriot gas to primary budget surplus and regained some Italy via the Greek island of Crete. While plans access to international capital markets again. for this project remain notional, a contract was Since Greece was able to internally fund its awarded to the Trans-Adriatic Pipeline project, needs through its primary surplus, it was which will begin pumping Caspian Sea gas believed in 2014 that Athens would be able to through Greece by 2020. Athens also worked exit its bailout program in 2015 without an with its Bulgarian partners to finalize plans for emergency line of credit. the Greece-Bulgaria gas interconnector, with the goal of unifying Europe’s energy markets in Greece also began to implement labor and response to geopolitical tensions with Russia pension reforms, as well as market over its involvement in Ukraine. liberalization measures and revised residency 2 Eurostat, “Unemployment Rates by Sex and Age Publishing, 2011), 65, http://www.oecd.org/gov/ Groups—monthly average, %,” October 15, 2015, governmentataglance2011.htm. http://ec.europa.eu/eurostat/product?code=une_rt_m&lan 4 International Monetary Fund, Greece, IMF Country guage=en&mode=view. Report No. 14/151, June 2014, http://www.mnec.gr/ 3 Organization for Economic Cooperation and sites/default/files/cr14151.pdf. Development, Government at a Glance 2011 (Paris: OECD 4 | HEATHER A. CONLEY AND JAMES MINA Greece’s collaborative diplomacy extended well concessions. It was hoped that the privatization beyond the energy sector. During this period, of Greece’s infrastructure would serve as a Athens also encouraged the fledgling catalyst for future investment in other areas of negotiations over the reunification of Cyprus, the economy. The private sector began to show and hosted talks with representatives of some employment expansion, but senior Greek Turkish Cypriot communities on behalf of officials noted that the inflow of funds from the Nicosia on February 27. Greece also hosted an sale of public assets would not benefit the Greek EU-Western Balkans Ministerial Conference on economy nearly as much as the incremental May 8, 2014, as a follow-up to the 2003 investments made by private owners to Thessaloniki Summit to demonstrate Europe’s upgrade existing assets.